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BELLEVILLE — Paul Carr was driving along Belleville’s North Front Street about a year and a half ago when he became troubled by the proliferation of payday loan stores.

“They seemed to be popping up quite quickly. ‘There's another one. There's another one.’ I started noticing that they were like almost a block apart, and I was thinking, this is unbelievable how quickly they're coming into our community,” says Carr, a councillor in Belleville. He counts 10 payday loan stores in this city of roughly 50,000 people. “We have a high poverty rate in our region … and so it concerned me that all these high-interest lenders were showing up in our community. How many do we really need?”

Belleville joins a growing list of cities — including Hamilton, Kingston, Ottawa and Toronto — that are taking advantage of Ontario’s Putting Consumers First Act, which came into effect in January and gives municipalities more control over where the businesses can operate. (There’s a grandfather clause that allows existing payday lenders to stay put.)

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The law also lowered the fees that payday lenders can charge; Carr says that despite a new maximum fee of $15 per $100 borrowed, this can still work out to an effective annual interest rate of 309 per cent.

Payday lenders offer short-term, high-interest loans that people typically use when other, cheaper sources of credit are unavailable. In theory, borrowers pay back the money with their next paycheque. Failure to pay back the loan within a certain period can lead to more fees and mounting interest charges.

Christine Durant, director of the Poverty Roundtable in Belleville, says high interest rates and short repayment cycles can make payday loans into a trap. For low-income people who use the services, “payday lenders become your emergency source [of money],” she says. “So if you’re on a fixed income, or you're not making enough from employment, and something happens you need to cover — be it medical expenses, dental, or getting your car fixed or whatever it is — then you have no access to credit. So payday lending becomes your access to credit.”

The spiral of debt

Robbie McCall of Ottawa knows well how dangerous payday loans can be. Nine years ago, he was taken off his job for health reasons, and forced to rely on Employment Insurance. He was unprepared for what he describes as a “drastic” pay cut. When Christmas rolled around, McCall, a single father, wanted to buy his daughter a pair of jeans but did not have the cash readily available to do so.

“So I borrowed $200,” says McCall. “And the caption said, ‘Borrow $200 for $20, the first time,’” he recalls.

He bought the jeans. And when he returned the next week, being on the limited income he was, he felt compelled to take out another loan. “It was only another $20, I thought. I couldn’t get that at the bank.”

A month later, he says, he was hit with the fees. And that’s when things started to spiral for McCall. His bank account was closed, taking away his overdraft protection and credit line. Soon he was cashing his support cheques at the payday lender, with all the associated fees.

“For almost a year, I thought I was paying off the principal on these loans, but it turns out, at the end of the year, I hadn’t even touched the principal. I was only paying the interest,” McCall says. “It was a rollover situation that I was totally unaware of. Eventually, I was going to multiple payday lenders to pay off multiple payday lenders.”

McCall says it took about nine years to finally get out from under the weight of his debts. He calculated that the interest on his loans — which started with $200 to buy his daughter a Christmas gift — amounted to $31,752 by the time he paid them off.

“That’s enough to buy a new car,” says McCall.

He paid off the loan with help from a CBC listener who heard his story and offered him an interest-free loan, as well as a friend who offered him a basement apartment.

Ottawa mayor Jim Watson said payday lenders “prey on the poor and the vulnerable.” The city has approved a motion that will direct staff to study capping the number of payday loan outlets, as well as the possibility of setting a minimum distance between them. Staff will also look at a licensing model for payday lenders, which would make it more expensive for them to operate in the city. It’s a model that Toronto is also exploring.

‘Good people in a bad spot’

Tony Irwin, president of the Canadian Consumer Finance Association (formerly the Canadian Payday Loan Association), represents the majority of payday lenders across the country. He says limiting the number of payday lenders could force people to find shadier sources for credit.

“People who access payday loans do so because our members will provide them with credit when no one else will,” Irwin says. “That's what this industry does on a daily basis for people who are good people, but they’re in a bad spot.”

Irwin says the payday lending industry is already heavily regulated by the province, as he agrees it should be. He is skeptical, however, about some of the proposals to change the industry, and what kinds of alternatives are being offered that are actually “scalable and real.”

“At the end of the day, [these municipal politicians] may in fact be actually hurting people who they say they're helping because they're forcing them to go to less attractive options. In other words, going online and accessing an illegal, unlicensed lender,” says Irwin. “Are you really helping them, or are you just making it more difficult for people who need to use this service?”

In a column for the Ottawa Citizen, Dijkema argued that banning payday loan stores “isn’t a solution.” He agrees with Irwin that cities need to be aware that payday lenders often fill a gap when other, more reputable options are not available to consumers. “There is data that suggest that when these things disappear, that loan-sharking goes up,” he says.

“What we should be doing, and asking ourselves, is how can the city use the limited assets and time that it has to help build a better market for consumers. So it helps them have more choices, and helps them move up the economic ladder.”

Dijkema points to the Causeway Community Finance Fund in Ottawa as an example of an alternative to traditional payday lenders. With the help of local credit unions, the Causeway fund offers low-cost loans combined with financial literacy for consumers.

He thinks Ontario is taking steps in the right direction overall, but he cautions that the lending industry is a fragile market and should be reformed slowly. “There is a proliferation of newer lending bodies, which is a great thing. I think it’s the type of competition you want,” Dijkema says. “The decimation of the lending market is probably bad for the consumer at the end of the day.”

In July, the province is introducing another round of changes to payday lenders that will make it tougher for them to conduct business in Ontario. In addition to restricting the amount that can be borrowed to no more than 50 per cent of someone’s net income per loan, lenders will also need to be more upfront with borrowers about the annual percentage rate being charged.

“Rather than banning these things which are not palatable,” Dijkema says, “An ideal market is one where there are plenty of alternatives which can help consumers achieve their goals, and their ends. And that’s what’s really been lacking. The real challenge has been the lack of choices in the market.

“An ideal market [for credit] doesn’t just help people to survive,” Dijkema says. “It helps them to thrive.”

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